Canada’s digital currency future

February 26, 2018

Julie Sobowale

After a long day of work, you decide to pick up a few groceries. You pull out your card at checkout – not your credit card but your prepaid Bitcoin card. This was one of the ideas floated by Matthew Burgoyne, an associate at McLeod Law, whose fintech and cryptocurrency practice in Alberta is growing.

“One of my first Bitcoin-related clients wanted to create Bitcoin gift cards that could be sold in convenience stores,” says Burgoyne. “It was a great idea, however the timing wasn’t right.”

Cryptocurrencies like Bitcoin are in the financial spotlight. While analysts debate when the next Bitcoin bubble will burst, more financial institutions, including the Bank of Canada, are looking to regulate cryptocurrencies or incorporate them into the current financial system.

The cryptocurrency phenomenon began in 2009 when Bitcoin was launched by an anonymous person under the alias Satoshi Nakamoto. The cryptocurrency can be bought on a digital currency exchange and used through a digital wallet. Bitcoin was the first major innovation to use blockchain. Each “block” in a blockchain holds a piece of information in a shared, distributed ledger and its decentralization enables easy access to the information. A new transaction is added to the blockchain when each block is verified through consensus. Once new blocks are added, they cannot be changed.

Bitcoin and other cryptocurrencies such as Litecoin and Ethereum are an attractive alternative for people in countries where the central banking system is unreliable and others looking to move away from a traditional banking system. Buying Bitcoin isn’t the only way to invest in digital currency. Data mining is quickly emerging as a lucrative market.

“Bitcoin mining is a way to get Bitcoin released into the market,” says Burgoyne. “Instead of having a central bank issue money, people with powerful computing power solve complex math problems, and those people are rewarded with Bitcoin. The person who solves the problems gets rewarded with part of the transaction fee or is paid in Bitcoin. By engaging in mining, people verify transactions and add to the blockchain.”

As Bitcoin prices rise, so does the reward. A company mining Bitcoin could earn 12.5 Bitcoins, which is more than $137,000, for solving one complex math problem. Quebec and Alberta are attractive sites for data mining companies due to cheap access to energy. China’s Bitmain Technologies, a major data mining company, is seeking to open a regional centre in Quebec. New startups are popping up including Hut 8 Mining Corp. in Alberta and CryptoGlobal in Ontario.

“Years ago, desktops could run software to mine Bitcoin,” says Burgoyne. “As a result of Bitcoin’s code, the level of difficulty increases as more people mine the currency and as a result, computational power needs increase. Mining takes up an incredible amount of energy.”

Will there ever be a Canuckcoin? In December 2017, Bank of Canada released a white paper, Central Bank Digital Currency: Motivations and Implications, on the possibility of Canada entering the market.

“It’s feasible at some point for the Bank of Canada to have its own digital currency but not in the near future as there are still too many risks and uncertainties,” says Burgoyne. “Blockchain hasn’t reached the point where it can replace a centralized banking system. Canada will be interested in what other countries are doing and whether digital currency is feasible on a larger scale. I believe the government will be cautious.”

Another trend to watch is the incorporation of cryptocurrencies into existing regulation. Last year the British Columbia Securities Commission registered the first investment fund manager solely dedicated to cryptocurrencies. In December, the Chicago Board Options Futures Exchange became the first traditional stock exchange in North America to list digital currencies.

“That move to the stock exchange is bringing Bitcoin into the mainstream for those who don’t understand it and don’t want to buy it to use as a currency,” says Burgoyne. “The exchange is regulated so it opens the market to others. It’s a different kind of commodity. They’re creating a different futures market.”

The U.S. is taking a close look at digital currency. In February, the U.S. Senate Committee on Banking, Housing and Urban Affairs held hearings on digital currencies and discussed the Securities and Exchange Commission’s role in regulating initial coin offerings. Meanwhile the five major credit card companies in the U.S. have blocked consumers from using their credit cards to purchase cryptocurrencies, citing fraud protection. Advocates for digital currency argue that the banks are trying to curtail investments in cryptocurrencies.

“In Canada, companies involved in digital currency have had a hard time getting bank accounts because these businesses have a higher risk profile and banks generally do not want to be exposed to higher risks,” says Jacqueline Shinfield, a partner at Blake, Cassels & Graydon LLP focused on regulatory compliance in the retail financial services and payments industry. “This regulation from the Chicago Board Options Futures Exchange could assist those that deal in digital currency with establishing banking relationships because the regulation will add legitimacy to what they are doing.”

What will happen to Bitcoin is hard to determine but the use of cryptocurrencies is likely to grow. The question is what the future will look like with more digital currency in the market.

“The younger generation don’t use digital currency in day-to-day transactions but they don’t use cash either,” Shinfield. “They have a Starbucks card on their phone and other similar apps to pay for things. So using digital currency will become a reality. We transact more digitally and there will be more payment options.”